Policy RoundUp - July 2024

Dear Member,

I hope you are enjoying the sunshine, and the Olympics!

July has seen a lot of developments for market regulation, with the new Listing regime being brought in as from this week including the new ‘ESCC’ listing category and fewer shareholder approval requirements, which will allow greater risk but is intended to better reflect the risk appetite the economy needs to achieve growth. Additional payment optionality for investment research will be possible as from today (1^st August), and the FCA has also issued its latest report on how it is complying with its ‘international competitiveness and growth’ objective.

Last week, the FCA issued its latest consultation on a revised ‘public offers and admissions to trading’ regime to improve the attractiveness of the UK’s capital markets. The latest draft prospectus rules include material climate-related disclosures and a new liability safe harbour for forward-looking statements. The FCA is also consulting on public offer platforms to provide an alternative route for companies to raise capital.

Reform of the FRC is back on the cards again, with the King’s Speech announcing that a draft bill will be brought forward on audit and corporate governance reform, which will establish a new regulator (ARGA) with new powers to take action against directors for serious failures associated with financial reporting and audit. The FRC continues its ‘root and branch’ review of the Stewardship Code, announcing further outreach before it issues its formal consultation. This FRC engagement will consider the role of proxy agencies, including how their research translates into voting recommendations and improving their transparency.

Look out for the launch of the new ‘Investor and Issuer Forum’ (IIF) at the Capital Markets Industry Taskforce (CMIT) conference on 6th September, on which we are looking forward to our ongoing work with the Investor Forum.

Meanwhile, the Society responded to IASB proposals for reporting on acquisitions, expressing concern around the risks of requiring non-GAAP reporting in the back half of the annual report. The IASB is also now consulting on disclosures about climate-related and other uncertainties in the financial statements. 

The plethora of international developments for sustainability reporting and its harmonisation continues, with ESMA recommending some key focus areas for preparing for CSRD reporting, PWC’s Inaugural Global CSRD Survey 2024 (which indicates tangible business benefits including improved engagement with stakeholders, but also various obstacles including data availability), and EFRAG providing further ESRS implementation support. Further resources have also been issued to assist with biodiversity reporting, plus investors have set out their expectations around sustainability assurance, and the some FAQs have been issued to explain the EU's upcoming Due Diligence requirements.

RoundUp will be taking a break in August, but will be back with a bumper edition in September.

Best wishes,

Liz Cole
Head of Policy and Communications
Linked In
www.irsociety.org.uk

New UK listing regime

The FCA's new listing regime began on Monday 29^th July, bringing with it the biggest changes to the listing rules in over 3 decades.

The UK now has a simplified listings regime with a single category (replacing the premium and standard segments), with streamlined eligibility requirements for companies seeking to list in the UK. The new regime will rely more on transparency and on companies engaging with shareholders, with no requirement for votes on significant or related party transactions, and increased flexibility around enhanced voting rights.

The FCA made several relaxations from their proposed draft rules, including simplified and more flexible disclosure requirements in relation to significant transactions – rather than a single announcement as proposed in CP 23/31, this disclosure can now be split into separate announcements, with a class 2-style announcement at signing and more detailed information to follow no later than completion of the transaction. Shareholder approval is still required for key events like reverse takeovers and de-listing.

FTSE Russell has now also confirmed how the new Listing Rules will impact eligibility for inclusion in the FTSE indices, with no immediate impact on the index composition on day one of the new regime.

Companies in the new Equity Shares (Commercial Companies) category (ESCC) or Closed Ended Investment Funds listing categories will be eligible for inclusion in the FTSE UK Index Series, with current premium segment listed companies automatically mapped to the ESCC or Closed Ended Investment Fund categories (as applicable).

Standard listed companies are mapped to the Equity Shares (Transition), Equity Shares (International Secondary Listing), or Equity Shares (Shell Companies) categories (as applicable).  Companies in the Transition (or other) category that wish to transfer to the ESCC or Closed Ended Investment Fund categories will need to be admitted to the relevant category by 6 August 2024 if they want to be eligible for inclusion in the FTSE in the next quarterly review.

For more info and links, read our blog, which also links to some useful Linklaters materials.

New 'public offers and admissions to trading' regime 

Since launching the new Listing regime (see above), the FCA has set out further measures designed to help strengthen the UK’s capital markets. Key to the package are proposed rules to establish the new Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM), which will replace the existing UK Prospectus Regulation Rules.

Under the proposals, companies will still be required to publish a prospectus when first admitting securities to public markets. However, a prospectus would not be required when a company raises further capital except in limited circumstances. The FCA's aims are to reduce the costs of listing on UK markets, make capital raising easier on UK listed markets and remove barriers to retail participation.

The proposals involve changing the rules regarding admissions of securities to UK regulated markets by creating a new Prospectus Rules: Admission to Trading on a Regulated Market sourcebook (PRM) and removing the Prospectus Regulation Rules (PRR).

The key changes include:

• increasing the threshold for triggering a prospectus for further issuances from 20% to 75% (though companies would still be allowed to produce a voluntary prospectus approved by the FCA for issues below this threshold);
• where a company has identified climate-related risks as risk factors or climate-related opportunities as material to its prospects, the rules would require certain climate-related disclosures to be included in a prospectus. This proposed new requirement may be complemented by further guidance; and
• Providing a clear framework to give companies legal certainty on what information constitutes protected forward looking statements (PFLS), which will be subject to an amended statutory liability threshold, and to ensure investors can identify and assess such content.

This Baker McKensie blog provides more detailed information on the proposed changes. The consultation (CP24/12) closes on 18^th October, and the FCA aims to finalise the new rules by the end of H1 2025.

Public offer platforms (POPs)

The FCA is also consulting on proposals for a new activity of operating a public offer platform (closing 18^th October). These platforms will offer an alternative route for companies to raise capital outside public markets including from retail investors. The introduction of the platforms should promote scale-up capital raising for smaller companies while ensuring that investors get the right disclosures on the key terms and risks of an investment.

This Macfarlanes blog provides more detailed information on the POP proposals, including disclosure and verification/due diligence requirements.

Final rules on new payment option for investment research

Following their recent consultation (to which the Society responded), the FCA has now confirmed that from today (1^st August) new rules will commence that give asset managers greater freedom in how they pay for investment research by allowing the ‘bundling’ of payments for research and trade execution.

The FCA made significant changes to some of the proposed associated guardrails, with the aim of making the new payment option operationally efficient to use and adaptable to different types of firms, and compatible with rules in other jurisdictions, and thus making it easier for asset managers to buy research across borders.

Read more in PS24/9: Payment optionality for investment research.

Asset managers increase investment research budgets globally for first time since MiFID II

According to the latest survey by Substantive Research, asset managers have increased their investment research budgets for the first time since the implementation of MiFID II in 2018. The survey found that:

• H1 2024 research budgets increased both as a proportion of AUM as well as in absolute terms, and
• As a proportion of assets managed, European budgets rose by a modest 4% (with US budgets rising 15%).

The survey indicates that the cycle of endless price depreciation and budget cuts across the board in investment research has come to an end.

Capital markets are the growth engine of UK economy

It is topical then that UK Finance has issued a series of insightful 'quick briefings' on unlocking the potential of our markets for businesses and savers, which examine the following key themes central to the debate around boosting UK capital markets.

• 'Risk and reward', which explores how the UK can balance a political and regulatory culture that both protects consumers and businesses while also supporting productive investment.
• 'The regulatory agenda' assesses the significant progress made to date on the capital markets regulatory reform journey as we now look to effective implementation.
• 'The growth escalator' brings to the fore some of the challenges facing companies as they scale, and
• 'A missed opportunity for retail investors' looks to the potential prize of greater retail inclusion in our markets.

The full briefing pack, and four individual briefs can be accessed here: UK capital markets: the growth engine | Policy and Guidance | UK Finance

FCA Report on Competitiveness of UK Markets

The FCA has issued its latest report on how it is embedding its secondary statutory objective to facilitate the international competitiveness of the UK economy (including in particular the financial services sector), and its growth in the medium to long term.

The report can be accessed here.

Audit and Corporate Governance Reform Bill

Economic growth was the central focus of the legislative programme announced in the King’s Speech and briefing notes. This includes a draft Bill on audit and corporate governance reform, to modernise the FRC’s powers and strengthen the transparency and integrity of the UK’s corporate governance, financial reporting and audit.

The establishment of the new Audit, Reporting and Governance Authority (ARGA) should restore trust in the audit and corporate governance system which underpins economic stability.

The draft Audit Reform and Corporate Governance Bill will give ARGA new powers to tackle bad financial reporting and help restore trust in financial statements, including powers to investigate and sanction company directors for serious failures in relation to their financial reporting and audit responsibilities. It will also have a wider remit, through extending Public Interest Entity (PIE) status to the largest private companies, whilst removing unnecessary rules on smaller Public Interest Entities, making life easier for important smaller businesses by cutting requirements that are disproportionate.

Meanwhile, the creation of the new Centre For Public Interest Audit (CPIA) realises the Brydon Review's vision of a profession-led commitment to bringing confidence to the corporate system and capital markets.

Stewardship Code review 

On 22nd July, the FRC gave an update on their Stewardship Code review, announcing further outreach to allow more discussion with stakeholders before they consult on any proposed revisions to the Code.

The FRC outlined their areas of focus for the next stage of the review (the "Five Ps"), which are:

• the purpose of the Code and whether it prioritises creating sustainable value and supports growth;
• the principles, notably those relating to how parties engage with each other;
• the role of proxy agencies including how their research translates into voting recommendations and improving their transparency - given the shift in capital markets toward index and passive investing, the role of proxy advisors holds greater significance than when the Code was first developed. There is a question as to whether the Code should reflect, in a proportionate way, the importance of proxy advisors by setting minimum expectations. 
• the process and whether it encourages high quality stewardship outcomes without adding undue burden; and
• the positioning of the Code within the broader stewardship regulatory and policy space. 

The roundtable for corporates is on 20th Aug and the Society is seeking to attend and represent member views. 

The FRC also published the latest list of signatories, and announced significant revisions to the UK Stewardship Code application process with immediate effect, to reduce the reporting burden on signatories to the Code. Effective for the next application round in October, applicants have the option to not disclose against ‘Context’ reporting expectations of the Code, unless there are material changes to update. In addition, signatories will only be required to report against ’Activity’ and ‘Outcome’ reporting expectations for Principles relating to conflicts of interest (3), promoting well functioning markets (4), stewardship, investment and ESG integration (7), monitoring managers and service providers (8), engagement (9), collaboration (10), escalation (11), and exercising rights and responsibilities (12). To further ease the length of reports, the FRC are explicitly allowing use of content from previous reporting and welcome cross-referencing, and are publicly restating that Principles relating to collaboration (10) and escalation (11) only need to be exercised where necessary. 

See this Freshfields blog for more detail.

Improving acquisitions reporting

The Society responded to the International Accounting Standards Board (IASB) proposals aimed at enhancing the information companies provide to investors about acquisitions.

The proposals respond to stakeholder feedback that reporting on acquisitions poses difficulties for both investors and companies:

• Investors lack sufficient and timely information about acquisitions and post-acquisition performance.
• Companies seek to provide useful information to investors but see risks and costs in providing some information, particularly commercially sensitive information that could be used by competitors.

The proposed amendments would require companies to report the objectives and related performance targets of their most important acquisitions, including whether these are met in subsequent years. Companies would also be required to provide information about the expected synergies for all material acquisitions. The Society responded expressing concern if these disclosures are required in the back half of the annual report, given the likely impact on audit and especially if acquisitions happen close to the year end.

Reporting of climate-related and other uncertainties in financial statements

The International Accounting Standards Board (IASB) is consulting on eight new proposed examples to illustrate disclosures in the financial statements about climate-related and other uncertainties. 

The proposed illustrative examples, based on the application of existing requirements in IFRS Accounting Standards, respond to investor concerns that information about climate-related risks in the financial statements is sometimes insufficient or appears inconsistent with other information reported by companies. Investors have always sought out companies that convey a coherent story to the market. This helps them build confidence in management, in companies and, ultimately, in their own investment case. The illustrative examples are designed to help to improve the reporting of the effects of climate-related and other uncertainties in the financial statements, and to strengthen connections between a company’s financial statements, sustainability-related disclosures and other general purpose financial reports.

The consultation period for the proposed illustrative examples runs until 28 November.

Read the press release: IASB proposes illustrative examples to improve reporting of climate-related and other uncertainties in financial statements

ESMA identifies key focus areas for issuers reporting under the CSRD

The European Securities and Markets Authority (ESMA) has published some Guidelines on Enforcement of Sustainability Information (GLESI), accompanied by a Statement on the first application of the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD).

Initial reporting by large issuers is set to begin in 2025, and the Statement helpfully outlines ESMA’s key enforcement priorities, which will be relevant to all CSRD reporting entities (and not just issuers who are caught in the first year of CSRD reporting).

ESMA highlights several crucial focus areas for preparing CSRD reports:

• Establishing governance frameworks and internal controls to support high-quality sustainability reporting. 
• Conducting a thorough and transparent double materiality assessment.
• Being open about the use of transitional reliefs.
• Preparing a well-structured and digitisation-ready sustainability statement.
   
• Ensuring connectivity between financial and sustainability information. 

PWC’s Inaugural Global CSRD Survey 2024

PWC’s findings indicate that reporting under the EU’s Corporate Sustainability Reporting Directive (CSRD) will bring tangible business benefits despite the tight timelines and complexity of the requirements.