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Directors' know how is a monthly article, which highlights key rule changes, proposed changes and market updates so that you know what is coming down the track.

The FCA publishes second Policy Statement on MiFID II

The Financial Conduct Authority (FCA) has published its second Policy Statement on MiFID II, which comes into force on 3 January 2018. It sets out the final rules regarding matters related to conduct of business and client assets.

Most importantly, the FCA confirmed its support for fund managers to continue receiving small cap research without payment where it has been commissioned and paid for by a smaller quoted company, including when issuing new shares. This will also cover broker research. This follows consistent campaigning from the Quoted Companies Alliance, which highlighted that the EU research unbundling proposals would further curtail distribution, and therefore production, of smaller company research.

Furthermore, the FCA decided to make the following policy change in light of the feedback it received on proposals contained within its third consultation paper on MiFID II implementation:

  • Inducements in relation to research – These provisions will not only be applied to collective portfolio managers and not only to investment firms subject to MiFID II. Guidance on how quickly research charge deductions should be passed into a research payment account (RPA) is also being revised to allow for greater flexibility. The rules will also clarify that investment managers are not required to have a single RPA per research budget.
  • Taping – The requirement for recording phone conversations and electronic communication to all investment services and activities carried out in relation to corporate finance business will not be applied. Instead, it will remove the current partial exemption in its taping rules for discretionary investment managers.
  • Best execution – The changes in the best execution rules in MiFID II to alternative investment fund managers will not be applied.
  • Appropriateness – Collective investment undertakings other than undertakings for investments in transferable securities (UCITS) are neither automatically non-complex nor automatically complex.

FRC defers decision on updating FRS 102 for major changes in IFRS

The FRC has published a Feedback Statement to its September 2016 consultation on updating FRS 102 for changes in IFRS. The consultation sought views on whether FRS 102 should be kept up to date with IFRS as IFRS changes, particularly in relation to major new standards that have been issued.

In our response, we encouraged the FRC to take sufficient time to assess how it is working in practice following the adoption of any new standard by the IASB. We noted that only then could a standard be properly assessed, as to whether the changes are proportionate and cost effective, as well as whether the new standard better meets the needs of the principal objective.

The FRC agreed that further evidence and analysis is required before any proposals to reflect the principles of the expected loss model of IFRS 9, IFRS 15 and IFRS 16 in FRS 102 should be made and acknowledged the need to provide periods of stability when possible.

The FRC has therefore decided that it will not be issuing a triennial review phase two exposure draft later this year. Nonetheless, the FRC will continue to assess emerging issues as they arise to determine whether action needs to be taken, and if so, in what form and when.

Tomorrow’s Company issues report on the role of non-executive directors

Tomorrow’s Company has published a report calling for a greater alignment between non-executive directors and executives with a renewed focus on promoting long-term investment with appropriate risk-taking.

The report argues that despite a range of reforms, there is scant evidence that demonstrates what good governance is. It cites the declining number of listed companies, as well as low levels of investment and public trust in business. It suggests that, too often, reform occurs after a scandal, which ultimately leads to increasing the governance burden on companies by disproportionately focussing on risk aversion rather than supporting entrepreneurial leadership and long-term investment. Boards should therefore be encouraged to invest in tackling societal problems.

The report goes on to argue that the increasing governance burden has led to a decline in board effectiveness by reducing the time for boards to discuss areas – such as stakeholder engagement, culture, strategy and disruptive technology – that can contribute to the long-term success of companies. This has created a lack of clarity in a non-executive director’s role, which in turn has exacerbated a focus on backward-looking financial information rather than on the future.

Boards should therefore consider the following issues:

  • Clarity of purpose and success – Boards should be united in the company’s purpose, values, key stakeholder relationships and appetite for risk. There should be a clear definition of success.
  • Clarity on each non-executive director’s role and value – The role of each non-executive director in contributing to the company’s agreed purpose and strategy should be clear. All non-executive directors should understand why they are on the board and the expectations placed on them.
  • A monitor or a partner?  Non-executive directors should be aware of the extent to which they are most effective acting as a partner to executives or a monitor of performance and compliance.
  • Time allocation – Non-executive directors should understand the time commitment required to be effective, particularly with regards to long-term drivers of value such as stakeholder engagement and site visits.
  • Information – It should be ensured that non-executive directors have sufficient information provided in a concise manner that will allow them to be effective. There should also be sufficient forward-looking topics to accompany the backward-looking financial statements.
  • Diversity of voices – Boards should consider how to encourage constructive challenge by increasing the diversity in experience and networks of non-executive directors.
  • Alignment – Boards should consider how all board members – both non-executive directors and executives – can help build a greater level of trust and sense of shared purpose.
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